The large cap indices reversed from all-time highs and stocks suffered a choppy week of trading. All of the major indices posted losses and the S&P 500 fell to five-week lows as the volatility index (VIX) spiked to five-week highs. Volatility was clearly evident in the Dow Jones Industrial Average, which delivered triple-digit moves every day last week.

The U.S. dollar continues its sprint higher. Precious metals continued to struggle but crude oil managed a bounce with a +2.2% weekly gain to close near $93.50 a barrel. Bonds also rallied and the bond market was buzzing on Friday after news that the bond king Bill Gross was leaving PIMCO, a company he founded, for rival firm Janus.

Economic Data

The Richmond Federal Reserve released their manufacturing survey which rose from 12 the month before to 14. That was better than expected. Existing home sales for August dropped -1.8% to a seasonally adjusted annual pace of 5.05 million home. It was the first monthly decline in six months. New home sales surged +18% in August to an annual pace of 504,000. This is the first time we've seen new home sales above the 500K mark since 2008.

The durable goods report for August crashed -18.2%, which is the biggest one-month drop since they began keeping track of this data back in 1992. Durable goods surged +22.5% in July and economists were expecting a -17.5% decline. The volatility in both July and August was due to the transportation component, mostly aircraft orders. Not counting the volatile transport sector the durable goods number improved +0.7% in August, that's up from a -0.5% pullback the prior month.

The big report for the week was the U.S. Q2 GDP estimate. Estimates were in the +4.3% to +4.8% growth range. The Commerce Department said their latest adjustments put Q2 growth at +4.6%. The +4.6% growth follows the -2.1% plunge in the first quarter. Average them together and we have a +1.24% growth rate for 2014. Current estimates for Q3 growth are in the +2.8% to +3.4% range.

Overseas Economic Data

The Eurozone reported their manufacturing PMI data slipped from 50.7 to 50.2. Their services PMI also pulled back with a drop from 53.1 to 52.8. Germany's manufacturing PMI declined from 51.4 to 50.3. Numbers above 50.0 suggest growth and these are all nearing negative territory. Germany reported their Ifo business climate index dropped from 106.3 to 104.7. Investors continue to pour money into the safety of German bonds. The yield on the 10-year German bund dropped to 0.91%, which is a new one-month low.

Part of the market's weakness on Thursday when the Dow Industrials lost -264 points, the NASDAQ fell almost 90 points, and the S&P 500 dropped 32 points, was Russia. A new law was drafted that would allow the Russian government to seize foreign assets in Russia as a move to counter economic sanctions from Europe and the U.S. This new law quickly followed news that Italy had sized significant assets from a rich Russian businessman close to Putin.

Economic data out of Asia was quiet and what we did get was mixed. The Asian Development Bank lowered their GDP estimates for the Southeast Asia region from +5.0% to +4.6% growth. Japan said their manufacturing PMI fell from 52.4 to 51.7, which was worse than expected. Yet that didn't stop the Japanese stock market from hitting multi-year highs. The China HSBC manufacturing PMI improved from 50.2 to 50.5. The Chinese Shanghai index hit a new one-year high last week.

Major Indices:

The S&P 500 fell -1.3% for the week. It initially bounced from support near 1980 and its 50-dma but the bounce failed at the 2,000 mark. The intraday lows on Thursday and Friday were near the 1965 area. That's not quite low enough to tag the bottom of its long-term bullish channel. I would not be surprised to see the S&P 500 dip to 1950 before moving higher. A breakdown under 1950 would be very troubling but the 1900 level should be significant support and is currently underpinned by the rising 200-dma. Year to date the S&P 500 is up +7.2%.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index

The NASDAQ Composite's -1.48% pullback last week has shaved its 2014 gains to +8.0%. The breakdown under support near 4500 and its 50-dma on Thursday looked pretty ugly. While the NASDAQ bounced back above this level on Friday I'm not convinced the pullback is over. I would watch for potential support at 4400 and 4350.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index

The small cap Russell 2000 index remains a potential warning sign for the market. The sell-off in small caps accelerated last week with the $RUT down four weeks in a row. The index did bounce near its August lows around the 1107 levels but the $RUT is now under its 300-dma.

You could argue the $RUT is short-term oversold and due for a bounce but I fear any bounce would roll over under its current trend of lower highs. There was a lot of focus on the $RUT's "death cross" with the 50-dma crossing below the 200-dma. Traditionally this is a bearish technical signal it doesn't have a good track record for the major indices.

If I had to guess at what the $RUT might do we could look for a bounce toward the 1135-1140 area before the index rolls over again. It is worth noting that Friday's bounce is just an inside day and the sell-off could easily resume without further gains. The real test is the 1080 area, which should be support. Last week the $RUT fell -2.4% which pushed its 2014 loss to -3.8%.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

Economic Data & Event Calendar

Wednesday is October 1st. A new month means lots of economic releases. There will be plenty of headlines. The ADP employment report comes out on Wednesday and analysts are expecting a dip from +204,000 new private-sector jobs to 198,000. The big report to watch will be Friday's nonfarm payrolls with analysts expecting +203,000 new jobs, up from 142,000 in August.

Another key event to watch will be the ECB meeting on Thursday. Last week the European Central Bank President Mario Draghi said the bank is ready to adjust its stimulus measures as needed. Draghi will hold a press conference on Thursday after the ECB's interest rate decision is released.

Economic and Event Calendar

- Monday, September 29 -
Eurozone consumer confidence
Personal income & spending data
Dallas Federal Reserve survey
Pending home sales
China HSBC manufacturing PMI

- Tuesday, September 30 -
Case-Shiller 20 city home price index
Consumer confidence (for September)
Eurozone Unemployment Rate
German Unemployment Change
Japan industrial production

- Wednesday, October 01 -
ADP Employment Change Report
ISM Index
Eurozone PMI
Auto & truck sales
China Manufacturing PMI

- Thursday, October 02 -
Weekly Initial Jobless Claims
Factory orders
ECB interest rate decision
ECB President Mario Draghi press conference

- Friday, October 03 -
Nonfarm Payrolls (jobs) report
Unemployment rate
ISM Services index

Looking Ahead:

The Q3 earnings season is just around the corner. Dow-component Alcoa (AA) is scheduled to report on Wednesday, October 8th. AA normally kicks off the earnings season but the pace of reports will not pick up until the following week. There was some analyst chatter this week that we could still see a number of earnings warnings before the earnings season starts. The main concern is how corporations may not be factoring in how a strong U.S. dollar might hurt profits for big multinational companies.

Another concern has been a downturn in corporate stock buyback activity. Companies have repurchased more than $2 trillion in stock since early 2009. In the first quarter of 2014 they spent $159 billion on corporate buybacks. That dropped to $116.2 billion in the second quarter. Has the stock buyback wave crested? If companies reduce their buybacks that might generate more volatility in individual stocks. The jury is still out on this issue.

Ho, ho, ho, there are only 88 shopping days left until Christmas. It remains a tough environment for retailers. Several have already commented on the lack of traffic and sales in the third quarter. Most are crossing their fingers that consumers will return for the holidays. Right now consumer confidence is relatively high, which should suggest a strong consumer. Unfortunately shoppers have been pretty picking this year. The low-end consumer continues to struggle.

On the plus side retailers are expected to hire an army of seasonal workers this year. Six years ago retailers hired about 325,000 seasonal workers. Last year that number hit 786,000. This year it could be closer to one million people. I bet a lot of them will be working for FedEx and UPS. If you recall last year the shipping companies had a disaster on their hands with a crush of last minute online shoppers flooding the order system and terrible weather teaming up to delay millions of deliveries until after Christmas.

Last week saw a return of volatility in the market. Market Hulbert at is warning that October will be worse. His research suggests that October is normally 12% more volatile than September. It's also worth noting that we are approaching 1,100 days without a typical -10% correction in the S&P 500. The market normally sees a 10% pullback about twice a year.

Geopolitics remain a threat for the market but last week they failed to grab the market's attention. Violence in Eastern Ukraine failed to make much news. The U.S. and its allies started airstrikes on ISIS targets in Syria and Iraq. That made headlines for a little bit. The Iraq Prime Minister warned that they had found new evidence that terrorists were planning to bomb the New York and Paris subway systems. This story made headlines for a while and then faded again. Headlines regarding the Ebola outbreak seemed to slow down as well. If any of these hot spots flare up again it could impact investor sentiment but thus far they haven't had much impact on the U.S. market.

I am bullish between now and the rest of the year but I suspect the next two or three weeks could be choppy. Investors may want to hold off on launching new positions until about mid October. Of course conditions could change so stay nimble.